Westerville Company reported the following results from last years operations Sales $ 1,800,000 Variable expenses 740,000 Contribution margin 1,060,000 Fixed expenses 700,000 Net operating income $ 360,000 Average operating assets $ 1,200,000 This year, the company has a $400,000 investment opportunity with the following cost and revenue characteristics Sales $ 600,000 Contribution margin ratio 60 of sales Fixed expenses $ 288,000 The companys minimum required rate of return is 10 10a If Westervilles chief executive officer will earn a bonus only if her ROI from this year exceeds her ROI from last year, would she pursue the investment opportunity No Yes 10b Would the owners of the company want her to pursue the investment opportunity No Yes 13 If the company pursues the investment opportunity and otherwise performs the same as last year, what residual income will it earn this year 14 If Westervilles chief executive officer will earn a bonus only if her residual income from this year exceeds her residual income from last year, would she pursue the investment opportunity No Yes 15 a Assume that the contribution margin ratio of the investment opportunity was 50 instead of 60 If Westervilles Chief Executive Officer will earn a bonus only if her residual income from this year exceeds her residual income from last year, would she pursue the investment opportunity No Yes 15 b Would the owners of the company want her to pursue the investment opportunity No Yes

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Posted on Sep 12, 2024

Westerville Company reported the following results from last years operations: Sales $ 1,800,000 Variable expenses 740,000 Contribution margin 1,060,000 Fixed expenses 700,000 Net operating income

Westerville Company reported the following results from last years operations:


Sales	$	1,800,000
Variable expenses		740,000

Contribution margin		1,060,000
Fixed expenses		700,000

Net operating income	$	360,000

Average operating assets	$	1,200,000

This year, the company has a $400,000 investment opportunity with the following cost and revenue characteristics:


Sales	$	600,000
Contribution margin ratio		60	% of sales
Fixed expenses	$	288,000

The companys minimum required rate of return is 10%.

10a.

If Westervilles chief executive officer will earn a bonus only if her ROI from this year exceeds her ROI from last year, would she pursue the investment opportunity?

	No
	Yes

10b.

Would the owners of the company want her to pursue the investment opportunity?

Yes

13.	If the company pursues the investment opportunity and otherwise performs the same as last year, what residual income will it earn this year?

14.

If Westervilles chief executive officer will earn a bonus only if her residual income from this year exceeds her residual income from last year, would she pursue the investment opportunity?

Yes

15-a.

Assume that the contribution margin ratio of the investment opportunity was 50% instead of 60%. If Westervilles Chief Executive Officer will earn a bonus only if her residual income from this year exceeds her residual income from last year, would she pursue the investment opportunity?